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Due to Europe's reliance on Russian energy supplies, the UK is experiencing the significant impact the war in Ukraine is having on energy costs (see: ). With the EU unveiling its plans to cut gas imports from Russia by two-thirds in the coming year, energy companies have benefitted from increased market share. Nevertheless, soaring energy prices are also driving UK inflation to its highest rate in 41 years and recent fiscal changes, as well as climate concerns, may present challenges for this sector in the future.

Profits amid crisis

A recent surge in share buyback activity illustrates the favourable position many companies operating in this sector find themselves in, with Energy & Utilities companies accounting for 14% of all share buybacks in the past 12 months. On 10 November 2022, Centrica plc announced plans to a £250m share buyback to return surplus structural capital to shareholders, representing 5% of its overall issued capital. The company’s share price has climbed steadily in recent months, increasing by 42.5% since 2021. Centrica confirmed that it is maintaining a strong balance sheet, â€˜with overall levels of liquidity having increased since the half year’. Similarly, an increase in its profits earlier this year, with returns of £7.5bn in the third quarter of 2022 alone.

Diversified Energy Company plc its share buyback in September 2022, announcing that the programme, ‘if and when implemented, will represent an appropriate use of the Company’s cash resource’. In addition, on 28 September 2022, energy company SSE plc allocated £125m for the company’s share buyback . In its announcement, the company commented:

‘SSE is currently investing at record levels, ahead of profits, and has committed to reinvesting any additional profits derived from market variability directly back into energy infrastructure that will help tackle the underlying cause of the current energy crisis’.

It is not only established listed companies looking to capitalise on increasing oil and gas prices. North Sea oil and gas production company, , announced its intention to join the premium segment of the London Stock Exchange market in October 2022 and was admitted to trading on 9 November 2022. Ithaca is one of the largest independent oil and gas companies in the UK’s Continental Shelf, ranking second by resources. While its official opening market capitalisation is yet to be announced by the London Stock Exchange, the company in its an expected market capitalisation of £2.51bn.

Struggling energy companies

Although some energy companies are recording record profits, over 20 smaller energy companies collapsed in 2022, as a result of the fixed deals they offered their customers leaving them unable to pass on the increased gas prices.

Struggling oil and gas company Hurricane Energy plc was approached by an unnamed bidder soon after the company gave control to creditors in a debt-to-equity swap, following the downgrading of its flagship field and production outlook. May 2021 saw the company’s share price collapse to below 1 penny. Hurricane Energy has since rejected the offer and a formal sale process, stating that the takeover approach undervalued the company:

‘The Indicative Offer is at a premium of only 13% compared to the midmarket closing price of 6.8 pence per share on 1 November 2022. The directors of Hurricane have concluded that the Indicative Offer should not be recommended to shareholders’.

Meanwhile, energy company Harbour Energy plc’s share price went into freefall after the company published its earnings. The company’s share price dropped to 307.40 pence per share on 24 November 2022, a substantial decrease from 530 pence in April 2022.  On 3 November 2022, the company announced that its tax liability is expected to be around £762m, £338.7m of which is expected to be spent on the UK Energy Profits Levy (EPL), also known as the windfall tax. Linda Z Cook, the company’s chief executive officer commented:

‘…the recently enacted UK Energy Profits Levy and speculation about further fiscal changes have created uncertainty for independent oil and gas companies like Harbour. As a result, evaluating expected returns from long term investments has become more difficult and investors are advocating for geographic diversification’.

Cook further urged the UK government to consider the consequences of any increase in the EPL:

‘While we fully recognise the significant challenge in the UK to put public finances on a sustainable footing, we urge the government to carefully consider the consequences of any increase in or extension of the EPL.  At a time when oil and gas producers are being asked to invest more to help ensure the UK's energy security and are considering longer term, material investments in CCS, additional taxes would run the risk of undermining our ability to do either.’

The company may be further incentivised to consider geographic diversification following the UK’s autumn budget statement, which took place on 17 November 2022, in which the government communicated that the windfall tax is set to increase from 25% to 35%. Jeremy Hunt voiced that he had â€˜no objection to windfall taxes if they are genuinely about windfall profits caused by unexpected increases in energy prices’.

The tax raises may be seen by some as the government’s way to mitigate increased public pressure on energy companies amid the costs of living crisis, as well as raise funds.

SSE plc has since issued a statement from CEO Alistair Phillips-Davies, who said: ‘It’s going to take money away from us, and therefore we won’t have as much to invest’. Phillips-Davies’ comments suggest that these taxes may inadvertently impact the environment, with the company’s CEO voicing concerns that SSE ‘may have to give up’ on some green energy investments.

Climate implications

Against what threatens to evolve into a more challenging financial landscape for the natural resources sector, energy companies find themselves under increased pressure from climate groups such as Extinction Rebellion. The organisation has become progressively more vocal and recently vandalised several branches of Barclays in protest against the investment bank’s financing of fossil fuels.

Concerns have also been raised that the UK may look to follow France’s lead in nationalising energy companies. France began the process of nationalising nuclear power group EDF to gain more control over its energy supplies as Europe struggles to find a replacement for Russian gas and prevent spiralling costs for consumers. The French Government said that the â€˜climate emergency and the geopolitical situation require strong decisions to ensure France’s independence and energy sovereignty’. The UK government has already set in motion the nationalisation of a division of the electricity and gas utility company, National Grid, in attempt to reach net zero. Concomitantly, the UK government is seen to be moving away from gas usage by imposing a gas boiler ban in all new builds to commence in 2025. 

Companies are also being held to account for their environmental impact by the investor community. For example, Legal and General Investment Management has communicated that from 2025, it expects to see climate targets integrated into companies’ long-term plans, among other stringent climate-related requirements targeted at certain industry sectors (see Market Tracker story here). This adds to a mounting set of guidelines and regulations that forces energy companies to incorporate a climate outlook in their own dealings. Market Tracker has conducted research that indicates that approximately 70% of all FTSE 350 companies have included a long-term outlook in their annual reports and many companies in the energy sector opted to produce a standalone ESG report.

A joint statement was on behalf of BG Group, BP, Eni, Pemex, Reliance Industries, Repson, Saudi Armco, Shell, Statoil and Total, communicating their commitment to collectively strengthen their actions and investments to contribute to reducing the greenhouse gas intensity of the global energy mix. For further analysis of how companies are disclosing their climate impact, see our upcoming Market Tracker Trend Report: Analysis of TCFD-aligned climate-related disclosures by premium listed companies in 2022.

Looking ahead, companies will also be mindful that the war in Ukraine may act as a catalyst for the acceleration of renewable energy alternatives, a development likely to significantly impact the energy market. Market Tracker will continue to monitor new updates in relation to energy companies, as well as how external factors may influence the sector.